Mexico Shadow Bank’s Collapse Leaves Some Investors in Dark

Bond investors in Credito Real SAB are crying foul after being left in the dark for more than a year in one of the largest corporate blowouts in Mexico’s recent history.

(Bloomberg) — Bond investors in Credito Real SAB are crying foul after being left in the dark for more than a year in one of the largest corporate blowouts in Mexico’s recent history.

After defaulting on $1.9 billion of dollar bonds in February 2022, the non-bank lender embarked on a liquidation process in a Mexico City court that bondholders say has been tilted against them. Now, lawyers are pushing for a deal that they say would allow creditors to recoup as much as 23 cents on the dollar.

The prospect of a resolution has helped push bond prices to around 13 cents, from a low of one cent last year. But even if the process is successful, investors say there’s a pattern brewing: Mexican corporations are turning to opaque, complex court processes in which they say local banks and investors are being paid first, often to the detriment of offshore holders. 

“This is a clear case of them playing favorites. And so far there’s been minimal transparency for most overseas bond holders,” said Oren Barack, managing director of fixed income at New York-based Alliance Global Partners who has been trading the bonds. “This is setting a bad precedent that, if it continues, will hurt Mexican corporates from accessing international capital.”

Attorneys for Credito Real had argued before a Delaware judge that bondholders were attempting to force the company into a US bankruptcy proceeding without “merit” and ignoring the legitimacy of the local proceedings. A Mexican liquidator negotiated settlements with creditors last year and created a trust that can now be used to pay back unsecured creditors.

The company did not respond to a request for further comment.

Started as the financing arm of General Electric’s long-time refrigerator and stove supplier Mabe, Credito Real grew into one of the country’s biggest payroll lenders, a business focused on making small loans at high interest rates against the salaries of government employees or pension payments. It also expanded into small business and auto loans, taking its total portfolio to around $2.6 billion.

Then in 2021, it reported a jump in non-performing loans and struggled to explain its declining performance to investors. In February 2022, it failed to roll over a bond of 170 million Swiss francs and defaulted on the rest of its debt. 

The Mexico City liquidator proceeded to strike deals with local banks that had lent to Credito Real in the following months, while holders of global bonds were seeking to force the company into bankruptcy proceedings in the US. According to filings in the US case, the company had around $615 million in bank debt that was settled “at a significant discount to par.”

The process is being closely watched by holders of more than $3 billion of defaulted debt from Unifin Financiera SAB, Alpha Holding SA, and the company formerly known as Mexarrend SAPI — three other non-bank lenders that are seeking to reach deals with creditors. It also shares similarities to the default of Mexican broadcaster TV Azteca, which stopped paying coupons on $400 million of debt in 2021 while it continued to pay local lenders and investors. Like Credito Real, TV Azteca turned to a local court process as investors seek to force it into bankruptcy proceedings the US. 

Mexico has had its share of drawn-out bankruptcies, from glassmaker Vitro SAB to the 15-year restructuring of the steelmaker known as Ahmsa. But what makes the recent cases different is that they have moved proceedings through local courts, rather than the federal bankruptcy process that would give foreign bond holders more transparency.

Stanislav Bozhenko, a fixed-income analyst who made a personal investment in Credito Real bonds, said he was frustrated at the lack of available detail on how much the banks had been paid. “We haven’t seen any documents. The process was completely nontransparent,” he said.

The dollar bonds are largely held by global investors, while locals had favored securitized instruments that the company said in a statement it amortized early back in January.

Notes due in 2026 fell 2 cents on the dollar on Tuesday to 11 cents, according to Trace data. 

The company has not filed financial statements since the fourth quarter of 2021 and has posted no audited financial information since 2020, which Bozhenko said makes it difficult to estimate a recovery value.

The lender and the lawyers who filed for an involuntary bankruptcy proceeding in the US were given some two months to convince a majority of holders to join the proposed restructuring deal that would be overseen by a federal bankruptcy judge in Mexico. If struck, the agreement would place Credito Real’s remaining loans in a shell company that would be partly controlled by representatives for bondholders. 

Luis Maizel, co-founder of LM Capital Management in San Diego, who had gotten out of Mexican non-bank lenders years ago, said collecting the remaining loans would be difficult, as borrowers may see little value in settling debts with a company that has vaporized.

“There will be some recovery,” he said, “but I think you better go to Vegas if you want to shoot craps.”

(Adds bond move in paragraph 14. An earlier version corrected the spelling of Unifin Financiera.)

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